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grantlawpc, Attorney

Category: Bankruptcy Law

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Experience: United States Bankruptcy Code:
Chapter 11 Business Attorney;
Restructuring and Recoveries

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This is Texas law-specific question dealing with exempt property,

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This is Texas law-specific question dealing with exempt property, or perhaps non-exempt property. Facts are that attorney files bankruptcy and at the time of filing is owed for fees billed to clients. The attorney is actually owed a share of such fees per agreement with the law firm with the balance of the fees paid by the client of the firm to the firm retained by the firm. Two part question is, one, should the amount owed to the debtor be classified as personal property and listed on Schedule B as a #18 "[o]ther liquidated debts owed to debtor..." and, two, can this liquidated debt be properly claimed as exempt property utilizing Section 42.001(d) of the Texas Property Code (i.e., exemption for unpaid commissions for personal services).

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Very interesting question. I love the theory. I’m surprised I haven’t ever heard it raised before.

First, the statute:

(d) Unpaid commissions for personal services not to exceed 25 percent of the aggregate limitations prescribed by Subsection (a) are exempt from seizure and are included in the aggregate.

So it would first seem that the exemption is capped at either .25 of $30,000 (single) or $60,000 (family) – so $7,500/$15,000.

Next, the case law. I did go ahead and run a Lexis search for you. I couldn't’t find any annotations/bankruptcy cases or state cases interpreting this statute.

So I think you’re left with just parsing out the statute to see if it applies.

First, are they the “debtor’s” unpaid fees. Was the lawyer a pc, or just practicing in his own name. If he was in his own name, then the argument starts. If it is in the incorporated law firm name, then, to the law firm, they might be unpaid commissions, but to him as an employee, is it just a salary or other employee claim…

I’ll presume he is practicing in his own name.

Next, I would say they satisfy the “unpaid” test.

Next, are lawyers’ fees “commissions”? In today’s age, commission normally implies percentage of sale price of a broker or other salesman. However, I would expect that you could argue that in the day this statute was written, “commission” really means “fee” – especially in light of the phrase “for personal services”

Next, are the fees “for personal services”? They are definitely “for services”; however, are lawyers services “personal” services. At first blush, I might say that “personal services” are more like “consumer services” such as yard guys, house cleaners, painters, etc. However, I would argue that in the context of this statute the term “personal services” means something other than “goods.” The problem with this argument is that it makes the word “personal” superfluous. Maybe “personal” means personally made by a specific person. If so, does that mean that if the lawyer had 50 partners, the commissions are not “personal”? My best read is that the word is probably a little superfluous, but when the statute was written, they were thinking in terms of individuals charges for services – and would include at least a solo practitioner’s charges for services.

In any event, I think the argument passes the good faith test. Good luck!

So the unpaid fee is owed to the law firm, and the law firm owes the agreed upon percentage to the attorney. The amount owed to the attorney is payable only if the firm collects from the client, and this amount is not based on any sort of percentage, so trying to classify it as a "commission" seems to me incorrect. As a result, do you agree that the amount owed to the attorney is most properly (or only properly) characterized as a "liquidated debt owed to the debtor" and that a claim that this amount is exempt property per 42.001(d) is not supported by a correct analysis of what this subsection is intended to apply to? My next question is whether the liquidated debt owed to the debtor can be "siezed" by the trustee and used to pay unsecured creditors of the debtor? Thanks.

I was arguing that the word "commission" doesn't mean that the amount is based on a percentage of anything. I was using the term "commission" to mean "fee" (think Michelangelo being "commissioned" to paint the Sistine Chapel)

First, if the amount owed to the attorney is payable only if the firm collects, then is it a post-petition asset? If the attorney couldn't sue the firm for the amount as of the petition date, how is it a prepetition asset or "liquidated debt owed the debtor."

Given the new facts, I guess the question is what is the relationship between the firm and the lawyer. Is he an employee, independent contractor or equity owner? What is the document that governs how the amount is owed to the lawyer by the firm. It sounds like it would be a verbal agreement that the lawyer gets paid (with withholding) if the firm collects the funds.

The Trustee would argue that the fees are "earned" by the lawyer prepetition, but subject to a condition subsequent of the actual collection. That would make this a prepetition asset that is just not collectible until postpetition.

The Trustee is also going to argue that (1) "commission" means percentage of; (2) "personal service" doesn't mean lawyers; (3) the cap applies; (4) "commission" only means sales commissions; (5) the claim is just an account receivable under "liquidated debts owed to the debtor"; (6) the debtor's claim is just a claim for unpaid wages or salaries; (7) etc.

If the Court rules that the fee is not exempt, the Trustee can collect the receivable from the firm directly (and maybe even from the client or Defendant) and use it to distribute to himself, his lawyer and creditors, as appropriate.

Are trustees that aggressive in terms of seeking to get such an unpaid receivable? Actually, there is no longer a receivable as the amount has been paid to the debtor post-petition. The amount of money collected would result in a payment to unsecured creditors of just over 2 cents per dollar of allowed claim. Also, in terms of income, how do you think a trustee and/or court would treat monies paid to a debtor (unemployment compensation) that the debtor is legally obligated to repay as they represented overpayments to her? This is a bit sticky but the desperate debtor applied for and accepted unemployment benefits even though she had earned income during certain time periods, recognizing that the overpayments of benefits would have to be paid back at some point in time. Perhaps it's best to just identify all amounts not paid back as of the petition date as income rather than bring to light the fact that improper unemployment claims have been made?

It really depends on the trustee. They do, at some level, make a cost/benefit/risk calculation on actions.

The unemployment benefits is really a whole new question, but, I would say that the way to handle that is to list the unemployment payor as a creditor and list the claim as unliquidated. Leave it up to them to determine if they have a claim. Remember that with the current scrutiny on debtors, it is much better to be honest because (in addition to the fact that it is the rule) most issues are resolved in bankruptcy (e.g. discharge) if you analyze them thoroughly enough. Overcoming a perception of intentional deceit can be very damaging (e.g. losing a discharge of the debt permanently).

Also, if they haven't filed bankruptcy yet, maybe the debtor should consider (especially in Texas) not filing bankruptcy at all. It really depends on the totality of the circumstances. But remember that collection rights of creditors are generally no better outside of bankruptcy than in bankruptcy. Bankruptcy just brings the issue to a head quickly.

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